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The pensioners budget

George Osborne blind sided his critics with a pensioner friendly budget but is it as good as it seems.

No-one predicted the pensioners’ windfall that emerged from George Osborne’s Budget speech this week. In a stroke, the Chancellor has changed the aspirations of those approaching retirement by eliminating the annuity trap.

The removal of the need to buy an annuity with your pension pot, plus the raising of the ISA annual limit to £15,000, the introduction of a new pension bond and even the raising of the maximum amount of Premium Bonds that can be individually held from £30,000 to £50,000 over the next two years, hands a long-awaited lifeline to the most penalised group since the 2008 financial crisis – SAVERS!

This transformation is also great news for financial advisers. They will wait to study “the devil in the detail” and these major pension changes need an Act of Parliament and won’t come in operation until April 2015 – but your adviser, like you, will have much more flexibility in your investment and saving choices. They will also suggest resisting the urge of using a lifetime of saving on a spending spree!

The Chancellor saved his best for last; all the above revelations came in the last five minutes of his speech, although Osborne got to his feet by announcing: “This is a budget for doers, makers and savers.” The pension revolution had the tagline: “You’ve earned it, you’ve saved it.” The unsaid last part was: “Now, you spend it!”

The biggest shock of Wednesday’s Budget was that the chancellor managed to keep his “rabbit out of the hat” such a secret.

“The Annuity Scandal” has been grabbing headlines over the past year and only last month, the Financial Conduct Authority (FCA) announced an inquiry into the “broken” annuity market.

It had already been announced that the annual contribution to a pension pot was reducing from 50K to 40K in 2014-15 – and the Lifetime Allowance was also coming down from £1.5m to £1.25m. These changes seem contrary to the government’s public campaign to get people to save for pensions, which many financial advisers felt was not always the best place to invest for your future.

Mr Osborne changed all that on Wednesday. The traditional argument about Pensions v Property has suddenly become more competitive and less one-sided.

There will be plenty of discussion before these changes come into effect, there is also bound to be some tinkering round the fringes – but it would be political suicide for the government to backtrack on the announcement that individuals will no longer be required to buy an annuity, they can take out as much of their pension as they want, when they want.

Obviously, if able, very few of the half million that are scheduled to retire before next summer are going to take out an annuity now. It is not yet clear if those approaching 75 – the age at which an annuity must be purchased currently – will be able to delay.

The chancellor did announce two changes to income drawdown that will take place from now (March 27). The maximum yearly income allowed will increase by 25% to 150%; and the minimum year’s secured income need to access drawdown had been reduced from 20K to 12K.

Other immediate pension changes include raising the limited from 18K to 30K of total pension savings that can be taken as a trivial commutation lump sum; and stranded pension pots up to 10K can be taken as a lump sum (up from 2K) and the number of stranded pension pots has risen from two to three.

The governments’ critics claim – as well as this being an attempt to win the “grey” vote at next year’s General Election - that this pension “freedom” brings real dangers of this money being squandered and individuals becoming the responsibility of the state in very old age.

Why someone who has shown responsibility and genuine concern for their retirement by saving over four decades should suddenly want to “blow it” does not really make much sense, especially as they are also probably used to taking regular specialist financial advice.

Another reason for Mr Osborne’s actions is not only the current annuity problem, but probably the fact that the pension pot has become a far more valuable tool in an area it was not designed for – Inheritance Tax.

It was George Osborne in 2007 who declared that the Conservatives would raise the IHT limit to £1m when they returned to power. The financial crisis and the Coalition saw the end of that. With the limit stuck at 325K until 2018 at the earliest, IHT became a tax on the South East and property. Now more and more of the country is over the limit.

Unless very rich, there are few ways for the middle class to avoid inheritance tax without taking chances on their future. One option, though, is by not touching your pension pot, it can be left to your heirs outside IHT. With derisory annuity rates, it has made sense to use other savings and investments for retirement, leaving the pension pot as the very last option.

Now savers will have real financial freedom and will be able to react to unexpected events and circumstances in later life, instead of being trapped by the “one-chance annuity saloon”.

What remains in the pension pot will now become part of the individual’s estate. His or her heirs will get the benefit – as will the Treasury, to the tune of 40% once the IHT limit is passed.

The Treasury will get less tax, though, when you draw on your pension. It is proposed that the 55% tax rate will be replaced and aligned with income tax rates. That will have the benefit of the individual seeing real tax savings by spreading those withdrawals over many years, another answer to the critics who are worried about “squandering”.

The Coalition has finally backed up its words on “saving” with action, not only with pensions, but also ISAs.

These new ISAs are going to be called NISAs – the “N” is for “new”. There will be no distinction between cash and stocks & shares ISAs – the new annual limit is 15K. These changes are effective from 1st July this year.

Ironically, one of the strong rumours before the Chancellor’s autumn statement was that there would be a lifetime cap on ISAs of £100,000. How quickly things change.

As happened with endowment mortgages, some are now predicting the death of the annuity. That will depend on the annuity providers, who have had things their own way for so long, taking a long, hard look at the market and providing a product that the investor believes serves the purpose and is a good financial deal.

Mr Osborne has certainly simplified the saving process, but there will be volumes of detail and small print produced in the months ahead. In many ways, the Chancellor has given back saving and investment freedom and choice to the individual – the increased need for expert and specialist advice is clear.

For a free, no obligation initial chat about your individual finances, call uson 0800 0112825, e-mail info@wwfp.net or take a look at our website www.wwfp.net.